Although flipping houses can be very lucrative as well as appealing, I must say it is not that simple. The process of purchasing a property and adding on renovations can not only become tedious but very costly. Not only do you need to buy the property and pay upfront for the renovations, but you also have to purchase permits.
The house flipping space is very rewarding but the biggest barrier to entering this space and finding success is finding the funding for a project. Without capital, your ambition to fix and flip houses will be unmet.
However, finding an institution to fund your project may be difficult it is not impossible. Whether you are starting your own business in flipping houses or just experienced in fix and flips, there are a variety of financing options.
By the end of this excerpt not only do I want you to identify what’s the best financing option for you but also begin or add to your existing portfolio all while growing as a real estate investor. Along with providing a few financing options, I will also help guide you in the right direction.
1. Traditional Bank Loans
Traditional Banking loans are often considered first, simply because we believe that loans can only come from banks. The process of getting a fix and flip loan from your traditional bank carries the same process as applying for a mortgage loan.
After your due diligence process you put up your appropriate down payment and the bank provides you with the funds needed for your house flip. Simple right? Wrong, unfortunately receiving funding to flip a home is not simple, especially for a house flipper.
As a house flipper or real estate investor (essentially that is what you are) your income is considered seasonal or irregular. For that reason, most banks will not approve your loan request.
Beginners just entering the field of fix and flips will also find it difficult for a bank to offer to finance because there is no experience to validate that the loan will be paid back. Even if you were able to maneuver through the layers of red tape the final loan product may not align with your needs.
2. Reality Shares
Although the flaming hoops you have to jump through to receive bank financing may have been discouraging, there are other alternatives, one option being Reality Shares.
RealityShares is a leading real estate crowdfunding platform that has helps investors finance projects all over. With over 92,000 registered investors this platform has crowdfunded over $300 million. Project sponsors can get financing for their fix and flip projects in as little as 10 days and choose whether they want their financing to be debt or equity.
In as little as 10 days you can receive a loan for your fix and flip project, and have the choice of making your financing debt or equity. If you have a minimum FICO score of 600 and a loan to cost less than 80% then RealityShares is looking for sponsors such as yourself.
3. Home Equity Loans:
If you have already acquired a personal residence then another popular option will be to tap into your home’s equity. A home equity loan (HEL) or a home equity line of credit (HELOC) can provide you with funding needed for flipping.
Not only does HELOC have some of the lowest rates you will find, but you also only pay interest on the money that you use. The only issue with this option, which is important to be aware of, is your home becomes collateral.
Simply put, if your fix and flip does not turn a profit, you could risk losing your home. This option is best suited for individuals who have a solid plan. I do not recommend this option for people doing their first fix and flip.
4. Friends and Family
It is said that money and relationships are like oil and water, they just do not mix. However, that should not discourage you to borrow what you need to get ahead in life. The benefit to this is you will not have to wait for any credit approval and I am almost certain the interest rate will be a lot cheaper.
Another positive to add to the pros is once you make a successful flip you can relish in the fact that your family or friends will enjoy the profits with you. I don’t know about you but I rather share profits with a loved one versus a financial institution.
Before you begin looking for funding for a fix and flip it is important to do your research. Investors should be well informed on the local real estate market including information about the area and potential contractors.
Although having good credit is key, it is only half of the recipe. Lenders are looking for investors with proven background experience and an actual plan.
If you are ready to start your next project, there are many funding options available. Online mortgage lenders and real estate crowdfunding platforms make it easier than ever to get funding for real estate projects. Traditional funding sources can take longer and have higher interest rates, but they also have benefits for some borrowers.
Despite the tedious nature of searching for funding for a fix and flip it is possible. Remember these takeaways:
- Fix and flip financing starts at home. Always consider family and friends in your network who are able to lend to you.
- A home equity line, 401k, or personal loan can be helpful especially if you do not require that much funding
- If the above options do not work, try a crowdfunding platform or a hard money loan.